To track the intended -- and more importantly, unintended -- consequences of policies,market movements,buyout deals and regulatory censure. This forum will map the multiplier effect of what may seem minor events initially but spread out far and wide.

11/06/2010

US’ monetary policy is making life very hard for US’ foreign policy. This is straight out of the classic adage that you can’t make everyone happy all the time. But then it is always prudent to watch out for exactly who you are making unhappy and what handles they could have over you.

The Federal Reserve on November 3 announced that it was going to buy an additional $600 billion worth of treasury bills over the next eight months to spur employment and kickstart the sagging US economy. While that may or may not revitalize the economy, it has achieved another unintended outcome for sure.

Fed’s policy action has managed to irk developing nations who foresee this dollar deluge sweeping up on their shores and creating, as they fear, asset bubbles. And that can make President Obama’s current visit to Asian countries before he meets heads of G-20 nations, very tricky.

The Fed’s action will effectively increase dollar supply and, it hopes, raise consumer spending. What will also happen alongside is devaluation of the dollar against other currencies, thereby eroding the export competitiveness of nations whose monies appreciate.

This would have been okay in other times. But when this happens two weeks after the finance ministers of G-20 have hammered out a difficult deal to contain an escalating currency war and just a week before President Obama meets his G-20 counterparts to seal the currency management agreement, it is exceptionally slippery. Whatever little was achieved in October 23’s G-20 communique now threatens to come undone.

How will US persuade other nations to allow appreciation of its currency when it is devaluing its own?

Agreed, Fed is the Central Bank of USA and will put domestic policy above all else. But by the same token, so does every central bank for its own country. Then how does one angle in international cooperation when the domestic policy is pulling it in another direction? I’m just glad I don’t have to answer that one… :)

Meanwhile, global community has been mincing no words and will likely grill US in the G-20 summit. German Finance Minister Wolfgang Schaeuble said the US is undermining efforts to create a level playing field in the currency market. "What the U.S. accuses China of doing, the U.S.A. is doing by different means," he said. China has also asked that “someone to step forward and give us an explanation”. The overseas edition of the People’s Daily in mid-October had carried a commentary from Li Xiangyang, an economist at the Chinese Academy of Social Sciences saying: “It is the dollar that triggered the currency war” and “driving the value of the dollar down is in line with America’s interests” – something “the international community ought to stay vigilant” about.

But then the US government has figured out it would rather please its domestic constituency first. Angering the world community is an externality that can be managed over time!

11/04/2010

We heard an interesting story about ‘money’ in our Global Economy class – about commodity money to be specific -- a few days back. It made me smile as I realized how the more things change supposedly, the more they remain the same J

Here goes the story:

About 500-600 years, the inhabitants of a tiny island called Yap, amidst the scattered specks of sovereign island nation Micronesia found its money in large, circular stone disks carved out of limestone. Called ‘Rai stones’, these coins were sometimes up to 10 feet in diameter and could weigh 4 metric tons. This wasn’t exactly our common jingling-loose-change-in-the-front-pocket that we reduce coins to!

A Rai Stone specimen

Source: Friar Forex website

Quarried from the island of Palau, these stone-coins were punctured with a hole in between so that men -- as many as hundreds sometimes – could put a bamboo through it and lug it on canoes and rafts to Yap, where they were used in transactions.

It’s value depended not just on how huge and exquisite it was but on whether the stone has a story. If many people – or none at all -- died in its transportation, it became far more precious. Rai stones till date are transacted upon in Yap on traditional ceremonies such as marriages, inheritance or to bury a family dispute!

In one instance -- and that’s where I got hooked -- a Rai being transported by canoe was accidentally dropped and it sunk to the sea floor. Although it was never again seen not could it be retrieved, still everyone continued transacting on it as if it were genuine currency for years thereafter.

As everyone agreed, Rai must still be there!!

Why does it remind me so much of the mortagaged-backed securities (MBS) and the umpteen times it was wrapped in yet another layer of securitization, until the structure became so complicated that nobody knew how to price it anymore? Or what was the piece of paper worth that they were holding in their hands?

Just like the Rai stone, these MBS just went on being traded since everyone agreed the houses and their value must be there, somewhere….and just like the rai stone, it had sunk, sitting somewhere deep down in the value spiral…and was as irretrievable as the stone-coin.

The only good reason why the ‘Rai’ bubble never burst was because nobody ever knocked on the doors of the guy from whom he had bought it off saying, “I don’t want this piece of paper anymore. I want the real deal. Go get the stone!” The real deal that just happened to be sitting at the sea-bed.

10/31/2010

Days after the G20 hammered out a global accord for currency management, economists are unsure if this fragile agreement will address trade imbalances in the face of unclear policy targets, an increasingly assertive Chinese leadership and a possible increase in dollar supply by the US government – factors that can undo any international cooperation.

The finance ministers and central bank governors of G-20 signed off an agreement in Seoul on Oct 23 to “resist from all forms of protectionist measures” and “refrain from competitive devaluation of currencies,” according to a statement on its official website.

The efforts to avert an escalating currency war, however, fell short of specifying clear targets for countries’ current account surpluses or deficits and left a lot to moral suasion. Heads of these G20 states will now meet three weeks later in November to flesh out the details of these difficult adjustments.

Calling it “a fig leaf agreement”, Kenneth Goldstein, economist with New York-based think tank The Conference Board said in an email, “The G20 communique is just a way to put a face on the lack of agreement on what the real problem is (and) therefore, what solutions should be pursued.”

Singapore-based Todd Elmer, who heads the forex strategy –Asia in CitiGroup wrote in a note soon after the G-20 agreement that the agreement “fell well short of some market expectations for a Plaza-style accord”.

China took the sting out of some criticism surrounding it. On October 20 and days before the G20 meeting, it raised its benchmark one year lending and deposit rates by 25 basis points signalling it was willing to be more accommodative but the dragon nation, with its new found assertiveness on global forums, is unlikely to bend too far for too long if it sees other nations defecting on their promise.

The US Federal Reserve is widely speculated to resume buying of bonds in its November 2-3 meeting. Its chairman Ben Bernanke publicly said on October 16 that a slow recovery, high levels of unemployment and a below-target inflation rate made “a case for further action.

Called ‘quantitative easing’ (QE), this policy action of buying bonds will increase US dollar supply, stoke inflation and make dollar cheaper against other currencies – an outcome that runs effectively counter to US’ demand in G20 that other nations don’t devalue their currencies even as it does so implicitly, in its domestic market.

The official G20 statement specified that all countries will follow “monetary policy which is appropriate to achieve price stability” and advanced economies, with reserve currencies – a pointed reference to the US dollar – will “be vigilant against excess volatility and disorderly movements in exchange rates.”

Even though “it seems the U.S. had to agree to refrain from devaluing the dollar”, wrote Chris Turner, head of forex strategy with ING Commercial Banking in London in his Monday report, he " doubt(ed) the market will run very far with the view that the Fed will, because of this G20 agreement, choose to avoid QE measures in early November.”

There are already murmurs of disapproval that could endanger this hastily stitched global pact. The overseas edition of the People’s Daily in mid-October carried a commentary fromLi Xiangyang, an economist at the Chinese Academy of Social Sciences saying: “It is the dollar that triggered the currency war” and “given a sluggish economy and huge amount of debts, driving the value of the dollar down is in line with America’s interests, both in short term and in long term. The international community ought to stay vigilant.”

Cheaper currency makes a nation’s exports more competitive and brings in greater revenues but if pursued by several countries, such competitive devaluation drags everyone down. An October 11 report by Dutch NIBC Bank N.V. had said at least 18 countries intervened in their foreign exchange markets in the past few weeks – it admitted to have possibly undercounted this tally -- setting off a new age version of the “beggar thy neighbour” game.

Aligning these pitted national interests will be the biggest challenge as the head of states meet in November to conclude this process, even though some say any agreement is preferable to none at all.

An October 22 report by the French bank BNP Paribus conceded as much: "(although) the chances of an agreement on forex rates (at the November G20 meeting are) small...there will be a lot to lose should the G20 agree to disagree."

10/26/2010

Our last week's writing class assignment sent us hunting and digging for interesting people with interesting ideas that actually make money too -- arguably one of the toughest assignments for us. I found my person in 'girl Santa' Ruchi Chopra who has perfected the fine art of springing surprises....read on:

One crisp and chilly October evening in 2006, Ruchi Chopra got an innocuous text from her friend sharing how she was craving a pizza more than anything else. A fashion designer working out of American clothing retailer Gap Inc.’s New Delhi office back then, the 23-year-old decided that some wishes deserve to come true.

Neck-deep in work and unable to step out, Chopra called a local pizza service and asked them [pizza service is singular] to deliver to her friend’s. Her only request, in a conversation that lasted thirty-five minutes with six employees at that pizza express was: don’t ask my friend to pay!

It backfired. After all, playing fairy godmother is a tough job. When the pizza was finally delivered, her friend was stuck with the bill! "I was so irritated, Chopra said. "They blew my surprise. Was it really that hard to pull off a surprise?” Yet something good came out of the incident, because it sowed the seeds of what today has become a curious and rapidly expanding business venture across India.

Her three-year old business, Any Surprise Any Place or ASAP for short, plans roughly 150 to 200 surprises a year across 10 cities in India. While ASAP customizes products too, the outfit has really caught the eye for being ‘surprise planners’. Chopra, now 27, was counted among the top 30 best business entrepreneurs by India's Business World magazine in March and won the Indy's Young Achiever Award in 2009.

The initial months, however, were a real stutter. In December 2006, Chopra decided to sample her business idea with close friends and family and got 30 chocolate bars imprinted with the ASAP logo, taped her contact details on the cover with a handwritten note about her firm, making it arguably the first chocolate business card of its kind. Then came the harder part: “I and one my friends went around the city, dropping these packets at 4 a.m. We were chased by dogs in some houses, stared at suspiciously by the watchmen in others..,” said Chopra, chuckling.

The next few days were pure heartbreak. The chocolate campaign generated just two calls. “Maybe the watchmen ate some of the chocolates,” she said upon reflection, but refused to give in. The second campaign made up for the first. A few days later, 150 people received fortune cookies that cracked open to read their individual names with the message “(Name), you have been ASAP-ed. Call ### to know why.” This was harder to ignore -- sixty-eight people bit the bait this time.

The next couple of months brought in so many more customers wanting to surprise their parents, friends, lovers and colleagues that Chopra had to scamper around after work to pull the logistics together. By Valentine’s Day of 2007, she was in eight places at one time, dodging her colleagues in Gap in hotel lobbies, as she planned these surprises. Of course, she was calling in sick more often than she really was, those days. By April that year, Chopra knew her venture was going to fly. And that entailed choosing between a cushy job as a fashion designer at one of the world’s top fashion labels or starting her own quirky venture. It wasn't a hard decision. “I was so young," she said. "It was just my first job.” Better to goof up early on.

The venture, at least in terms of funding, was easy to launch. The initial promotion and website cost about $1,200 , which Chopra paid for. She kept her overheads low, sometimes even working from a laptop in her bedroom. All she really needed was a wild fire imagination and she had lots.

The best part of her business: people have no price points, no notion of a fair price. They’ll pay just about anything to stage a moment in a loved one’s life.

Over the years ASAP has devised a full repertoire of tricks up its sleeve to flip you. The firm has so far created personalized 'monopoly' games – a board game that will have pictures of places that are memorable to the giftee, say her school, her first home, her vacation etc; a personalized magazine cover/newspaper that only has pictures, stories written by her friends, customized wine labels and lots more. Kids often get greeted by a clown or their favorite animation characters carrying cakes on their birthdays.

Once ASAP filled up the boot of a guy’s car with helium balloons and a gift and waited for his fiancé to open it. She said yes, of course.

Two years ago I hired ASAP, requesting a guitarist to take a birthday cake to my mother and sing her favorite Abba songs outside her door. She was equal parts thrilled and embarrassed and I’m told she kept trying to hush the singing fellow because neighbors were getting curious. Chopra says her most logistically grueling assignment was planting 40 surprises for a guy on his honeymoon across two days and that meant traveling one step ahead of the couple in every place. For $4,500, the gig started with a personalized car radio program to bathroom towels to silverware and ended with midnight crackers and a customized salsa class for the couple.

Then, there are also the weird ones such as edible lingerie. A daughter once asked ASAP to prepare a “naughty cake” for her father’s 70th birthday and got a three-dimensional cake in the shape of a girl in pink bikini. There was more. The cake had tequila shots stowed away inside and tiny straws jutting out of the cake. “I think I was more embarrassed than the father,” Chopra laughs.

ASAP employs just six full time employees but has “half the world freelancing” for them. After all, as Chopra explains, she doesn’t need a clown to come in to work five days a week on a work station. And it makes a pot of money – there is a profit margin of 20%-80% in every surprise -- although Chopra would not divulge hard figures.

There are challenges too. Finding suppliers is one. Many of the suppliers are just not interested in making 1-2 pieces as it isn’t profitable. But then getting them to do the whacky stuff is another. “You have no idea what we go through when we ask a tailor to make a pair of boxer shots and print “Poochie-Coo” or some such love lorn stuff on the backside,” she said.

Her business is a bit of a con job alright. But who cares? Conning our dear ones into some of their most memorable moments is the best way to show we love them. And you don't have to be a six year old enjoy surprises. And Santa needn't crash down ur chinmey anymore. I think he got laid off :) ...and last heard, his work was outsourced to some more efficient Indian firm, ASAP!!? :)

10/22/2010

US’ Federal Reserve is in a situation. It is finding itself in a curiously unenviable spot where no matter what it does, some nut or bolt of the economy keeps coming lose. Fed Reserve chairman Ben Bernanke had said a week ago that there was “a case for further action” – read increasing the supply of dollars in the market – as the inflation was below Fed’s 2% benchmark and the US economy was growing too slowly for the agency’s comfort.

His comments are crucial for two reasons. Firstly, Fed has never admitted to ‘inflation targeting’ in the US economy in the past. Secondly, it nearly confirms the market buzz that the central bank will resume buying of US bonds in its early-November meeting, as it hopes more money in the hands of consumers will increase consumption spending and buoy the economy.

That policy rates are near zero levels and cannot be reduced any further – a first aid of sorts for central bankers all over in managing their economies – narrows its options. Bond buying is the other option and Fed is considering it.

If Fed were not to do this, the US economy which is on a slow slog anyway, may slide back in the pit. Enough economists believe that a double-dip recession is a possibility. To boot, mortgage giants Fannie Mae and Freddie Mac continue to guzzle tax payers money with the sector regulator pegging the tab at $154 billion. If the economy worsens and home prices crash – the worst case scenario -- this cost may rise to as much as $259 billion.

So yes, another slip is the last thing Fed can afford, quite literally!

If Fed pushes up the dollar supply – and it most likely will – it sets off a lot of jitters domestically and globally. Fed economist James McAndrews, at conference in Boston, hinted that Fed should set aside more capital as a buffer against potential future losses instead of simply turning over enormous amounts to the Treasury.

The agency’s holdings have ballooned from about $900 billion before the financial crisis to more than $2.3 trillion now while its total capital, at $57 billion, is just 1.1% of total assets. With more bond buying, arguments for a larger capital reserve only get more plausible.

Moreover, Fed’s policy stances are coming in the backdrop of an escalating currency war worldwide where countries are devaluing their monies to push up exports. Trouble is, it becomes a race to the bottom when everyone starts doing it. Nations are already struggling to come up with a coordinated mechanism to avoid precisely that.

So how far can US push its bond-buying strategy in the domestic market if it is simultaneously advocating that other nations, such as China, allow their currencies to rise? There are already murmurs of disapproval.

This is a bad spot for any central bank to be. It makes me think if there is anything at all that the Fed can do without setting off a land mine somewhere? No, doesn’t seem so. There will be blood. For now.

10/15/2010

I had earlier blogged about a brewing currency war (see here) but recently I unearthed some data that I found intriguing. The war of cheapening their country’s currency to bag a larger share of exports, has not only escalated, it has widened and is pulling in many more actors than we knew of.

18 to be precise, says the Dutch NIBC Bank N.V. in its October 11 report. In my last post, I was piecing together anecdotal evidence and statements from the Brazilian finance minister to conclude that an increasingly interventionist mindset was influencing the governments in minding their currencies. This report, however, documents that at least 18 countries – and NIBC says it could have missed a few – “have intervened in FX markets over the last few weeks, including Japan, South Korea, Indonesia, Russia, Singapore, Columbia, Thailand and Brazil.”

That China is not relenting on yuan is old news. The newer part is that Japan and South Korea are now quibbling over latter keeping the ‘won’ low and eroding Japanese competitiveness. Moreover, countries such as the US and UK which have not directly intervened in currency markets so far, are also planning to undertake further quantitative easing. This increase in money supply will have the same impact of depreciating their currencies.

It will be interesting to see how this dynamic unfolds and spreads; how each one of these countries balance their national interests as they play a new age version of this ‘beggar thy neighbour’ game. The obvious losers? Countries in the European Union such as Greece and Italy! They are stuck with deficits, saddled with the euro that leaves no flexibility in managing their currency. No longer able to depreciate their currency to boost their exports, these nations but can only see others grab a larger slice of the global exports pie.

10/14/2010

US’ Bureau of Labor Statistics reported a stagnant unemployment rate of 9.6% last Friday. Now depending on whether you are a pessimist or an optimist, you’ll view it as bad news or good news. But that’s not why I’m talking about it. Hidden deep inside the pile of published labor statistics that day, was one tiny piece of rather disconcerting data.

The number of ‘discouraged workers’ among those not employed, shot up 71.25% to 1,209,000 in September 2010, said the government department. Of this, 730,000 were men and 478,000 women. The net addition overall, to save everyone the math, was 503,000. These people are simply not in the labor force anymore.

Now I would worry about that if I was a policy maker.

Why are these people losing heart and no longer ‘actively’ seeking work? How long were they unemployed before they decided to call it quits from the labor force? What will they do now for a living? What about the families of these 730,000 men? After all, the answer to these questions will have important ramifications for the labor market and consumption dynamics?

Have these ‘discouraged workers’ enrolled for unemployment benefits or not? That’ll determine the tab taxpaying citizens who have a job, are picking.

The government data, in a footnote, explains who all it counts as ‘discouraged workers’: “those who did not actively look for work in the prior 4 weeks for reasons such as thinks no work available, could not find work, lacks schooling or training, employer thinks too young or old, and other types of discrimination.”

Now this raises more questions than it answers. Also the longer a person is unemployed, the less employable he becomes and that can spike the population of these disheartened workers. The number of those unemployed for 27 weeks or more has increased to 6,123,000 last month compared to 5,447,000 in September 2009, implying more people are sitting out and for longer.

My gut feel is that when an economy crawls out of its dump at a slow pace – US economy is expected to grow at 2.6% in 2010 and 1.9% in 2011 – it fatigues its labor force, a part of which is just filing out job applications day after day. A dull economy – characterized by low hiring and consumption levels – creates more of these discouraged workers and more of these workers overtime contribute to sluggishness of the economy. This completes the vicious circle.

The silver lining is that discouraged workers will be easy to woo back. They just need to see their neighbours and friends get jobs and better ones and they will re-enter the job pool in a jiffy.

These workers are not in the labor force and therefore don’t worsen the unemployment numbers. If that is so, then is anybody looking out at all for these disappearing faces in the workforce?

10/13/2010

Last week, I and my NYU classmates were sent off to track ‘Predictably Irrational*’ behaviour in people and capture this through our own little experiment. It was a tricky one because nearly everyone I knew vouches to be a rational consumer and economic theory backs them all they way in this presumption. There was no way they were going to react irrationally unless I conned them. Just a little bit, in a harmless sort of a way.

Alan Greenspan’s December 1996 expression ‘irrational exuberance’ has been quoted and storied to death in media. I thought may be I could turn the concept inside out, if I could clip people’s usual levels of exuberance!? What if the mind frame in which the decisions were made could be changed– described as relativity’ in Dan Ariely’s book, Predictably Irrational *.

The construct was simple: Ask people that if they won $50,000 in a lottery right away, how would they divide it? They could buy a new car, make a down payment for a new house, shop, invest in the stock market, gold, deposit in a bank or give away in charity.

The control group of 15 people answered the question on a clean slate of mind; the second group of equal size first read dismal data on the US economy and then answered the same question. I made small talk on the data with the second group to ensure a) they had actually read it and b) their risk perception was sufficiently heightened.

I wanted to know if risk-priming, even for 30 seconds, makes people allocate their wealth differently? How generous can people really be if they are bombed with data that makes them edgy about their future? As a journalist, I was simply curious to figure out if screaming headlines can affect decisions?

The results were unambiguous. Ask any researcher and they will tell you it is a eurekaaaaaaaah moment when your data gives you clean results!!

Average allocation for a new house and gold jumped nearly three fold and five-fold after risk-priming while money going into stock market whittled down to a fourth. And generosity went out of the window! Charity fell to one-eighth of the control group levels after people perceived a bleaker outlook for their future. It seems people donate based on their general sense of well being. If they feel they could end up in a corner, they are going to be more self-serving.

Bank deposit figures were surprisingly immune to risk perception but most people said they didn’t have too many alternatives to keep money safe, even if it meant near-zero interest rates. One of my respondents actually wanted to stuff money in her pillow but later decided to stash it away in a bank anyhow.

So yes, we are only as rational as our latest set of thoughts. Tweak it, give it a new context and we jump to a new set of decisions. I pondered earlier but now I know – armed with an excel sheet – that all rationality is relative!

………………………………..

For those who are curious on what data I carpet-bombed my ‘risk-primed’ group with, here goes, hold on tight:

95,000 people lost jobs in September, 2010. Private sector hired but state and federal governments shed 159,000 to increase overall unemployment.

US economy’s unemployment rate is one of its all time high levels of 9.6%.

US will grow at 2.6% in 2010 but slip to 1.9% in 2011. Between 2010 and 2014, it will grow at an average of merely 2.3%.

The interest rate on bank deposits in US is hovering between 0.05% and 0.5%.

In the first nine months this year, 125 banks have failed in US and 829 more have been identified as “problem” institutions by FDIC -- the highest figure since March, 1993.

Economist Nouriel Roubini believes the risk of a “double-dip” recession is increasingly likely. He attaches a 40% probability to it.

US businesses are shuttering nearly 20% more manufacturing plants than they open. This means that there are roughly as many factories now as they were in 1972.

10/08/2010

A few days back I was talking to a classmate on how obsessed the media is with China globally and now I can plead guilty to the same. So I’m going to write about China today but keep off it for a couple of weeks at least – a self-imposed gag order! Unless the country switches to gold standard or some such…well actually, I’m wondering if that’ll arrest the brewing currency war (see last post).

China is going all out to teach mandarin to people across the world, believing firmly that if people can speak your language and empathize your culture, they’ll understand you too. Confucius Institute Headquarters, a non-profit organization in China supported by the Ministry of Education, is leading this charm offensive with spectacular results.

By June 2009 – and that’s the latest data available -- 282 Confucius Institutes and 272 Confucius classrooms had been established in 83 countries and regions globally. Now look at the spread: 94 in 29 European countries, 87 in 11 countries in the Americas, 70 in 28 Asian nations and just 21 across 15 African states. Not hard to guess who they are trying to build bridges with, the fastest!

And the most impressive part is they started just six years back. China set up its first Confucius Institute overseas in end-2004 flagging off what could be the most organized state-funded promotion of a language worldwide – are there any other such instances anyone knows of?

The teaching centres are offering teaching scholarships for foreigners and holding Chinese proficiency competitions called “Chinese Bridge” world over and being lapped up. Even countries like India, which were reluctant so far, have began biting. A September 28 FT story said that 260,000 people worldwide were already enrolled in Confucius Centres last year and another 250 institutions from over 50 countries are vying to establish their own Confucius Institutes or classrooms.

The official website of the Confucius Institute gives you the usual mouthful of on what they are aiming to do and it can leave you breathless. Here goes: “promoting the understanding of Chinese language culture, enhancing the educational and cultural cooperation between China and the world, developing the friendship between China and other countries, to help developing a multicultural environment and building up a harmonious world.”

But I like the public diplomacy mandate put out by one of their newsletters far better: “Learn Chinese, Make Chinese Friends”. Short and sweet.

10/06/2010

A currency war is brewing. And it is no longer between the two largest economies of the world, setting off what's beginning to look like a new age ‘beggar thy neighbour’ game.

The US House of Representatives last week passed the Currency Reform for Fair Trade bill to institute a mechanism that will investigate if a foreign currency is fundamentally undervalued – read yuan – for a 18-month period. If so, US can impose counter-veiling or anti-dumping duties that will correct the misalignment.

While the bill has to be cleared by the senate and signed by the president before it becomes a law, China has been quick on its defense.

US believes China’s historically undervalued and tightly controlled currency is hurting its economy through what it alleges to be ‘trade subsidies’. That could well be true.

China believes that the latest bill targets the yuan, violates the World Trade Organization rules and signals rising US protectionism. That could be true too.

But even as these two countries thrash it out in this currency slugfest, the undercurrents of this is forcing countries to re-align worldwide.

Japan’s central bank surprised the markets and worried the IMF by re-instating its ‘zero interest policy – it had gone off this in July, 2006 – and announcing plans to inject liquidity in the system to stimulate its domestic economy. It had not intervened in the foreign exchange markets in six years.

China’s undervalued currency makes exports such as those from Japan look cheaper, thereby edging out competition. To boot, China is now the biggest exporter and that amplifies the trade distortions.

Japan is not alone in deciding to bid 'yen' down. Switzerland had undertaken an intervention against the ‘Swiss franc’ in 2009 for the first time since 2002 but did not sterilise it by buying back the additional money supply in the domestic money markets. South Korea has been holding down its ‘won’ for some time. So has Taiwan.

Brazil has been complaining about how its ‘real’ has been appreciating against the dollar but it too has authorized its sovereign wealth fund to sell the currency on its behalf.

These measures are effective only if they are not matched by the trading partners of countries. For now, this trend seems to be going viral and that is not good news.

How far will China back down and allow its currency to rise in the face of heightening global pressure and a pending US bill? Hard to guess but that will be key to defusing this situation. Other countries will likely stop if they can rest easy that their cost competitiveness is not being preyed upon.